He has offered to work with the newly-formed Yesh Atid party, which shocked observers by coming second with 19.

However, its leader, popular former TV presenter Yair Lapid, has demanded reform of a law under which ultra-Orthodox Jewish seminary students can defer their military service. Religious parties in the current governing coalition are strongly opposed to any changes.

Lapid has also said he would only join a government that was committed to revive the peace process with the Palestinians, which has stalled since Netanyahu took office.

"Whoever wants Yesh Atid in the coalition will need to bring these things," Ofer Shelah, a senior member of the party, told Israeli Army Radio.

On Wednesday morning, Israeli media reported that with 99.8% of votes counted, the joint electoral list of Mr Netanyahu's Likud party and the ultra-nationalist Yisrael Beitenu (Israel is our Home) party of his former Foreign Minister Avigdor Lieberman had won 31 seats.

That would be 11 seats fewer than the two parties' combined total from the last election and below the forecasts of recent polls.

The ultra-nationalist Habayit Hayehudi (Jewish Home), which rejects the notion of an independent Palestinian state, won 11 seats, as did the ultra-Orthodox religious Shas party.

The smaller ultra-Orthodox United Torah Judaism party won seven, bringing the right-wing bloc's total to 60 of the 120 seats in the Knesset.

Yesh Atid (There is a Future), a secular centrist party which was only set up by Mr Lapid last year, had been expected by pollsters to win about 12 seats, but is set to get 19, just ahead of the Labour party with 15.

The centrist Hatnua (The Movement) grouping of former Foreign Minister Tzipi Livni won six seats, as did the left-wing Meretz party. Kadima, which was the largest party in the last parliament, got just two.

The remaining 12 of the left-wing bloc's 60 seats went to Arab Israeli parties, but they are traditionally neither are asked nor seek to join governing coalitions.

The BBC comments that coalition building in these circumstances will not be easy for Mr Netanyahu.

The prime minister will need the support of Lapid, who wants to cut the privileges enjoyed by ultra-Orthodox Jews - about 10% of Israel's population - but also the parties which have traditionally defended those privileges.